My Long Journey to House-Hacking

Though I am at times susceptible to feeling sentimental, I’m generally not one who looks back to the past full of regrets. In fact, if I were to come up with a Modus Operanti for myself, it would probably be something like “Move Forward”. Having said that, I would be lying if I told you I didn’t have any regrets – we all do, even the most optimistic and forward-looking among us. And my biggest regret when it comes to real estate is not house-hacking sooner.

I’m 38 years old as I write these words, and it took me 37 years on the planet to become a “house-hacker”. Now, for the sake of any beginners out there just looking to get into real estate, allow me to define this term, coined by Bigger Pockets:

“House-hacking” is a simple concept. It means purchasing a primary residence, where you, the owner, occupy part of it and rent out the rest. The “hacking” part is that by renting out part of your property, you reduce (or in extreme cases, eliminate) your housing expenses. House-hacking is an alternative to both renting and owning a single-family home. Because, let’s face it, owning a home is also expensive, if you don’t have any rental income to offset some of the costs involved.

In other words, the idea of house-hacking is to take home ownership to the next level by not just owning your home but using it to generate income.

My Journey to House-Hacking

Before I get to the myriad benefits of house-hacking, allow me to rewind the clock a bit to give you a bit of my back story, in the hopes that some of it may resonate with you and sound familiar.

For starters, until recently, I was a life-long apartment dweller -- from my childhood in Kiev, Ukraine, to my adolescence and young adulthood in South Brooklyn, to my bachelor stint living in a crappy 350 sq. ft studio on Manhattan’s Upper West Side, to my semester abroad renting an old flat in Barcelona, capped by nearly a decade of renting in expensive “Brownstone” Brooklyn with my wife (and then with our two kids).

As is often the case in life, I had a lot of preconceived notions about home ownership, even though (or maybe because) I had never experienced it myself. Here are just a few that come to mind:

• - Home ownership = suburban isolation and boredom.
• - Home ownership = constant chores – mowing the lawn, shoveling snow, raking leaves, etc.
• - Home ownership = headaches – something breaks, you gotta fix it. You can’t just call the super.
• - Home ownership is expensive.
• - Home ownership limits your flexibility to move, change jobs, etc.

Being a city slicker and apartment dweller my whole life, I was never exposed to the many positive aspects of home ownership, and not having discovered Bigger Pockets until 2018, I had never heard the term “house-hacking”. Of course, while that term may be relatively new, the concept of renting out part of your home is probably as old as real estate itself. It just wasn’t on my mental radar at all.

In fact (and I’m almost embarrassed to admit this), for most of my 30s, I was a proud renter in gentrified Brooklyn who scoffed at people who bought homes and moved out of NYC. Perhaps it was a subconscious defense mechanism, but I actually judged people who went from renting in NYC to owning a home in NJ. I thought they were “throwing in the towel” on having a life, being able to walk to places, interacting with others, etc. I pictured their weekends being spent on the merry-go-round of shopping – from Costco to Home Depot to Bed, Bath & Beyond.

The ironic thing is that while I judged those that bought homes and moved out of very pricey parts of NYC, which includes most of Brooklyn these days), I eventually began to grumble about our own living situation. My wife and I rented a large one-bedroom in 2012, right around the time we got engaged, for $2,200 a month (a very reasonable price at the time for a nice section of Brooklyn facing Prospect Park). It was the perfect size and location for us. Just two people and a lazy cat. But fast forward 7 years, and that one-bedroom apartment now housed two more dwellers – our 5-year-old son and our 3-year-old daughter. We were bursting at the seams, even after multiple rounds of Marie Kondo sessions.

On top of the space constraints with two growing children, the apartment itself had suffered a lot of “wear and tear” over the years. The bathroom tiles were cracked, as was the paint on the kitchen walls and ceiling. The old metal windowsills looked horrible after 7 years of absorbing moisture from the rain. And we had water stains in the bedroom ceiling that the super never fixed. The property management company in Manhattan didn’t care, and we weren’t going to fix it ourselves. Why spend money on an apartment we were renting?

I knew this wasn’t sustainable, but I couldn’t see us leaving our part of Brooklyn. The park, farmer’s market, cafes, bars, stores, subway, good public schools. Where would we go? And buying in our area was out of the question – at least for us. The prices just didn’t make any sense. Hundred-year-old rowhouses with ground-floor rental units in our neighborhood, Windsor Terrace, (and I’m not talking fancy “brownstones” in neighboring Park Slope) were selling for $1.5 to $2 million. And these were fixer-uppers!

If you’ve read this far, thank you for putting up with my really long-winded backstory. Now, to get to the point. How did I go from being a life-long apartment dweller to becoming a proud homeowner, landlord, and house-hacker? The truth is (and this may sound like a cliché) I had an epiphany one morning. I was drinking my coffee and looking out the kitchen window past our rusty fire-escape, admiring the treetops in Prospect Park, and I started to worry about money. Our lease was about to renew, and the new rent was going to be $2,350. For those of you living in expensive markets, like NYC, DC, LA, or SF, that may not sound like a lot (and that was the mental game I played for a while), but I started to think of that number in absolute, not relative terms. Yes, $2,350 is a lot cheaper than living in a new luxury rental in Manhattan, but it’s still a lot of money to be paying in rent for an unrenovated, and in fact, deteriorating, one-bedroom apartment. It dawned on me that we were going to spend over $28,000 in the next year on rent alone. No tax write-offs, no equity-building, no prospects for wealth-creation, and no incentive to fix or improve something that’s not ours.

But my money worries didn’t just end with our annual rent expense. We were considering putting our 3-year-old daughter in daycare full time, but the prices in our part of Brooklyn were, in our opinion, excessive. It would cost us around $24,000 for the academic year! That’s annual tuition at many State Universities, and we are talking about a 3-year-old doing sing-alongs and taking timed naps. (Thankfully, our son was going to Pre-K for free thanks to NYC’s Universal Pre-K program.)

$28,000 in rent + $24,000 in daycare costs = $52,000 for the year. And that’s before accounting for other expenses, like groceries, utilities, kids’ clothes and shoes, car insurance, public transportation, and all the other expenses involved with raising a family in New York City.

That’s when something clicked in my head. We needed to make a change, and we needed to do it ASAP. We weren’t getting any younger, and with our living situation and monthly expenses, it was very difficult to build savings, let alone wealth. In that moment, I knew we had to move out of our apartment and buy a house.

By then, I had read several real estate/business books, including Brandon Turner’s Book on Rental Property Investing and Robert Kiyosaki’s Cashflow Quadrant, so real estate thoughts were already bubbling up in my brain. This was just the culmination of fledging ideas meeting cold-hard facts.

The Epiphany

I now understood we had to buy a primary residence to get out of the apartment we had long-ago outgrown and change our financial trajectory, but the question was: Where?

I spoke to my wife, Julia, and she completely agreed. In fact, she is the one that put me onto Bigger Pockets and some of the books I mentioned earlier. She was just surprised that this sentiment was coming from me, since for years, I was the guy that said we couldn’t give up a rent-stabilized apartment in a great part of Brooklyn, let alone move to Jersey!

She nudged me into reading these books in the hopes of buying investment properties, but never thought I would consider house-hacking as a good option for us.

Fast forward a few months.

I was now having my morning coffee looking at the sun rise over 2-and-3-storey homes in Bayonne, NJ. For the first time in my life, I was a homeowner, and it felt great! And what felt even better was being a landlord as well. In a few short months, I went from a life-long tenant to a landlord!

You see, once we made a decision to move to NJ, we decided to look for 2-family homes to “house-hack” and after some process of elimination, zeroed in on Bayonne (I’ll delve into “why Bayonne” in a separate post). We closed on a nice home with plenty of “value-add” potential on a great block within a few months of starting our search, then we spent the summer putting in a lot of sweat equity (literally, since we were working on renovating the house in the summer heat!). Once we were done renovating, we found great tenants within a week of me listing our rental.

And here is the best part: Our monthly housing expense as owners of a 2-family home in Bayonne, NJ, is now lower than it was when we were renting a one-bedroom apartment in Brooklyn!

Which brings me to the biggest benefits of house-hacking:

Six Benefits of House-Hacking

I know you want to see the numbers, so I will oblige.

Comparing the Numbers:

My last rent in Brooklyn, before utilities, was $2,350.

My PITI (principal, interest, taxes, insurance) in Bayonne is $3,400 a month. Our tenants pay us $1,400.

Of course, we now have to pay for water and heat – two expenses covered by our landlord in Brooklyn – but even after subtracting $150 total for water and heat (estimated and averaged out over 12 months), my net housing expense is around $2,150 a month. So, I’m actually saving $200 a month in out-of-pocket costs, or $2,400 a year!

Benefit #1: Lower housing costs 

So, the first benefit of our house-hacking strategy is that our net housing cost has gone down.

But wait, the benefits of our house-hacking decision don’t end there.

Benefit #2: Tenants are subsidizing our loan paydown

Our tenants are covering our annual property tax bill entirely, plus a portion of our mortgage payment. That means that they are subsidizing our loan paydown over time, since each month, part of our mortgage payment goes towards paying down the loan principal balance. Yes, I know what some of you are thinking -- early in the life of the loan, most of the payment goes towards paying interest. That’s true, however, as the loan amortizes, a greater percentage of our monthly payment will go towards principal.

Benefit #3: Debt is fixed, rental income isn’t

When we were long-time renters in Brooklyn, we knew that every year we got our lease renewal notice our rent would go up. That’s just the nature of the business. Rents generally go up over time, which makes sense, since inflation increases prices on everything, including cost of living. Now, as landlords, we get to be on the receiving end of that price trend. We fully expect to raise the rent on our rental unit every year, albeit, gently, since we really like our tenants and want to keep them (not least because vacancies are expensive).

On the flip side, to finance the purchase of our home, we locked in a 4% interest rate on a 30-year conventional mortgage. Not only is that a lower rate than we would have gotten in 2018, it’s near historic lows. And the best part is that our monthly principal and interest payment obligation will remain the same for the life of the loan. Of course, our insurance premium and property tax bill will change over time, but at least the cost of debt is locked in for 30 years (unless we decide to refinance down the road, of course).

So as long as the annual rental increases exceed risking insurance costs and property taxes, we stand to benefit even further from our house-hacking strategy, because our net annual housing expense should decline over time. To take this point to its ultimate conclusion, if we were to hypothetically stay in this house for 30 years, we will have paid off our loan entirely (in part, subsidized by our rental income), and would be in a position to not only live for free but to actually make some money every month (as long as rents exceed taxes, insurance, and utility expenses)!

Side note: We don’t plan on waiting 30 years for this to happen, since we want to pay down our loan aggressively and hopefully get rid of the debt in 15 years, not 30.

Benefit #4: Numerous tax write-offs lower our tax bill

One of the greatest advantages of owning real estate (versus renting) are the tax incentives. The US Government has for a very long time encouraged home ownership, for many reasons I won’t go into in this post. I’m excited to be able to write off my property taxes (up to $10,000, based on the new tax laws), and my mortgage interest. These two write-offs apply to anyone who owns a primary residence.

But what most home buyers don’t realize is that when you buy a multi-family property with the plans to occupy part of it and rent out the rest, the tax advantages are even greater.

As a 2-family house-hacker, there are two other major tax advantages:

1.  Cost of improvements, capital expenditures, and maintenance, as it relates to the rental unit(s). 

This includes “common” areas and shared features, including roof, hallway, basement (if shared), yard, driveway, etc. Knowing this, I saved all my receipts from our summer renovation work and am looking forward to expensing a portion of the cost of putting down a new roof, installing HVAC, the cost of paint and supplies, hardware, renovating the kitchen, and much more.

2.  Depreciation on the rental portion of our property.

I love this one! And it’s different from all the others, in that it’s an accounting expense, not an actual out-of-pocket expense. In other words, unlike writing off my property taxes, mortgage interest, or the cost of rental unit improvements and maintenance, deprecation is just an expense on paper. In simple terms, it allows me to depreciate the rental portion of my home’s value over 27.5 years, based on my home’s assessed value. The higher the assessed value, the higher the amount you can take as a depreciation expense every year.

Note: When you sell a home, the US government will take into account the cumulative amount of depreciation you’ve taken on the property.

Benefit #5: House-hacking as a Wealth-building Strategy

I think this one hurts the most when I think about it. That’s because when I meet with young, smart, ambitious investors looking for their first house-hacking deal in their early-to-late 20s, I am reminded about how much wealth I could have built by my current age (38) had I gotten in the game in my 20s. But, alas, I can’t turn back the clock, and it’s better late than never.

I’m just glad that my wife and I are finally on the road to building sustainable wealth and financial independence through both active income streams and real estate investing. Here are the top ways in which real estate ownership (and the house-hacking strategy, specifically) will help us accelerate our wealth-building:

Lower tax bill.

Who doesn’t like paying less in taxes? As I outlined above, the numerous tax advantages of owning real estate, especially a rental property, usually contribute to a lower tax bill, which of course, means that we’ll have more money left over at the end of the year for other things, including putting more money away in retirement accounts, saving up for our next investment property, or just adding an extra cushion to our emergency fund. It’s simple, the more of our earnings we can keep each year, the more assets we’ll have to invest to grow our net worth.

Area appreciation.

Real estate values go up over time, roughly 3% nationally, year-over-year, on average. Yes, there will be market cycles, including occasional downturns, but in the long run, real estate is a consistent way to grow your net worth, because people will always need a place to live. And, of course, real estate is very local. What applies in Boise, Idaho, may not apply in Brooklyn, NY, and vice versa. We are happy we bought our 2-family home to house-hack in Bayonne, NJ, because we believe the fundamentals are strong and the area has a ton of upside – both in the near term and in the long run. Frankly, I don’t care where prices will be a year from now. We’re planning to stick around for a while, so we know that as long as we hold onto our home, we’ll build equity from Bayonne’s home prices going up over time.

Forced appreciation.

But we are not just sitting around waiting for area home prices to rise. We have added a lot of value to our home by performing equity-building improvements and renovations, including adding central air, putting down a new roof, building a new kitchen on the second floor and renovating another kitchen on the first floor, re-painting most of the house, and adding cosmetic features like crown molding. If we were to sell it today, it would be worth significantly more than we paid for it, simply due to the improvements we have made. That’s why for investors, including first-time house-hackers, it’s important to buy properties that leave room for improvements. Otherwise, you’ll be paying top dollar for someone else’s improvements, and limiting your ability to force equity appreciation.

Lower housing expense means more money for other investments.

By going from Brooklyn renters to Bayonne house-hackers, we’ve saved about $200 a month in housing costs. But on top of that, we’ve lowered our tax bill, which means even more money in our pockets at the end of the year. All those savings will help us accumulate the funds necessary for a down payment on our next investment property.

No longer having to worry about what next year’s rent increase will be.

It’s hard to build sustainable wealth as a renter (unless you rent your primary residence but own a bunch of investment rental properties or make a lot of money and have other types of investments). Not only are you not building any equity or benefiting from all the tax benefits of property ownership, but you’re also at the mercy of your landlord. Of course, you may be lucky and have a great landlord that doesn’t raise your rent, but for the vast majority of tenants, the dreaded annual lease renewal notice means more money out of their pockets each month if they extend the lease. After many years of putting up with that, we’re now on the flip side of that as landlords.

Speaking of being a landlord, here is the final benefit….

Benefit #6: Gaining experience as landlords

We plan to build a portfolio of cash-flowing rental properties over the next decade, and what better way to gain experience as landlords than in our own primary residence? I think house-hacking is the best and easiest way to become smart, experienced landlords, which will benefit us in the long-run, as our rental portfolio grows.

Let me know what YOU think. Have I missed a key benefit? What has your experience been as a house-hacker? How old were you when you did your first house-hack? I would love to hear from you. Thanks for reading!